Maybe "Paid" Is the Future of Online Business

29 Comments

[qi:110] In 1988, “Saturday Night Live” aired a parody commercial deriding clumsy business models. “At First CityWide Change Bank, our business is making change,” said actor Jim Downey, portraying a naive “service representative.” After listing various ways in which his company could break a five, he explained how money is made. “The answer is simple: volume.”

More than 20 years later, I wonder if some digital entrepreneurs think the same. “Simple: we’ll make money on volume of traffic, at some future date,” they promise, even if the math doesn’t add up right now. Despite a knee-deep recession, the idea of giving away something for free and charging for something else later is bigger than ever. But is “free” selling?

Free
Although not the inventor, the chief evangelist of the “free” world is author and Wired editor Chris Anderson. Last year, before the recession hit, Anderson outlined his upcoming book in a cover story titled “Free! Why $0.00 Is the Future of Business.” A year and a half later, the final subtitle was changed to a less pretentious “The Future of a Radical Price,” “mostly because ‘why X is the future of business’ is now a cliche,” Anderson tells me.

The gist of his book: “People are making lots of money and charging nothing,” he writes (via the LA Times). In fairness, though, the idea of “Free” is a little misleading, since someone has to part with money so someone else can profit. “For most customers in the marketplace, the product is really free,” Anderson clarifies in an email. “The difference is who the paying customers are: advertisers or ‘premium’ users,” which effectively summarizes Anderson’s thesis.

The only problem? It’s difficult to cite thriving examples of either ad-sponsored or paid upgrades taking place online, at least when compared with the disproportionate amounts of money still being exchanged for offline goods and services. Google is the glaring exception, a web darling Anderson is quick to reference in his book. But even the search giant isn’t perfect — YouTube is a money pit, as part-time critic and full-time intellectual Malcom Gladwell notes in his dissenting review of “Free” for the New Yorker.

Obviously, Anderson is glamorizing a little with his endorsement of “Free.” His hardcover retails for $27. A subscription to Wired will still set you back $12 per year. And his Geek Dad blog, an admitted labor of love, is hardly capable of piquing investor interest (at least not yet), despite Anderson’s suggestion that the site is another successful example of the “Free” model.

But Anderson isn’t the only wordsmith endorsing a “Free” future. Well-read business author Seth Godin tells me, “There are 100 great companies that are using generosity as a scalable business.” He didn’t name names, but I’m sure success stories exist. Nevertheless, Godin isn’t as hasty to call “Free” the next big thing. “It is a future business model, not the future,” he emphasizes. “It’s so easy to misunderstand Anderson’s point.” Indeed.

Paid
So if “Free” is one way to skin a cat, does “paid” have an online future? For example, how about charging RSS subscribers, who enjoy instant delivery of trusted content to their “doorstep” without having to go out of their way to find it elsewhere? Anderson says no. “I doubt content companies can charge for RSS. Your content has to be incredibly unique and valuable, which may describe Bloomberg but not the average media site.”

Godin also balks at the idea, calling it shortsighted. “It’s like charging someone to go on a date. If your goal is to get married, why on Earth would you do that?”

I was unable to find working of examples of paid RSS subscriptions for this story. But there has been a cottage industry of paid newsletters since email was popularized in the ’90s. And the capitalist pig in me can’t help but think how much a 3 percent to 5 percent conversion of paid subscribers might yield. If only someone were willing to jeopardize their subscribers and try it.

Perhaps my suspicions of “Free” would have been obviated had that living, breathing economy decided not to exhale. But exhale it did, and here we are wondering what can be done to exploit the growing popularity of the Internet during times of uncertainty, amid a myriad of nascent, sometimes under-performing business models.

So until products like Facebook, Twitter and YouTube start operating on earned income instead of venture capital, the Internet might need to move to a paid system, especially if we hope to sustain intellectual property and original content produced by reporters, artists and entertainers. We might even be able to do it the old-fashioned way — you know, enticing a prospective customer into your “store” with an incredibly compelling product. Then selling it to them. Like cable TV.

29 Comments

jlg

It’s been obvious for several years that no content site can get big enough to support the costs of producing the content only through advertising. The NYT site makes perhaps $150 million in ad money and is one of the biggest news sites around. That isn’t enough revenue to pay for the newsroom. Meanwhile, Google skims off everyone else’s free content and gets the ad revenue.
Why wouldn’t the business model be similiar to that of any other consumer product: you give free samples to lots of people in hopes of enticing some of them — say 10 percent — to buy. 10 percent of 10 million online `tasters” is 1 million. Times $XX, say $50a year, it starts to be real money.

Roger Toennis

Another SNL skit I think applies is an old one from the 70s where Father Guido Sarducci boiled Business down to something that still applies. He said “Business? Itsa very simple. You buy something…you sell it for more.”

Until grocery stores start giving away food for free, houses/apts are free and dept stores give me free clothes and shoes, I need to earn a salary to feed, cloth and house my kids…and so do you and so does every other responsible adult. That means I, or my employer, needs to get paid enough so I can feed my kids. That means my employer, who pays me, can’t operate unless someone pays them for products and/or services..

Now certainly Google and a dozen, or a hundred, other companies are using “Free” and some are even making enough money off the PPC or other ad based models to sustain operations.

But here’s the problem. A “Free” based economy can’t scale. Even if 1,000 US companies could survive using “Free”, and pay lets say an average of 10,000 people a piece a living wage of some level, that is still only 10,000,000 jobs that perhaps can feed/clothe/house an average of 2 adults and 2 kids per salary. That’s only 40,000,000 people getting 3 squares and a place to sleep. With manufacturing largely gone form the US and white collar corporate job migraitng overseas also, what about the other 260,000,000 people in the US?
And in reality, in the long run, what about the other ~5.75B people on the planet?

The reality is there is no way that even 1,000 companies with 10K employees per company are going to be able to be money-making concerns for any significant length of time on “Free”. “Free” simply doesn’t scale.

The reason is, there aren’t enough ads being impressed today on internet users, nor will there ever be, to generate enough money to allow Free to be a viable foundation for any significant portion of the economy. In fact people are getting better every day at ignoring and not responding to advertising on TV, Internet and everywhere else. Sure there are still, for a while at least, going to be a handful of companies who can reach a critical mass using Free and ad-based revenue. But it will never be enough to support a significant number of people with food/shelter/clothing.

So this whole argument over whether Free versus Paid is a tempest in a small teapot.

The future of the internet is in “paid” services. In 1999 I desperately needed access to a LOT MORE information of all kinds. So I was willing and eager to immerse myself in the full stream of info available on the internet and web. But in 2009, I desperately need LESS total information access because the full stream is way to big for me or anyone to handle on their own. So 1999 to 2009 has ben a blip in time where ad based revenue works because everyone had to wade through the flood on their own and therefore we’ve ben susceptible to the internet advertising that has made Google and osme others quite rich.

But today? Things are changing. Today, I desperately need to get ONLY the information from the internet stream that I NEED to achieve the goals I have set for myself and not even get “wet” with most of the information in the stream. It is already nearly impossible for each of us to sort through the immense flood of data to find the best and specific examples of information we each want/need.

So, going forward, the main thing people will pay for is personalized/customized filtering of the internet information tsunami that continues to grow exponentially. If there are 30 companies all offering me Free service in every possible category then I have a dilemma. Which free service do I choose so I don’t waste all my time trying Free services. I likely will pay to have someone point me at the “RIGHT” Free service for me. Then I likely will be willing to also pay for that service I choose to make sure the quality remains acceptable over time so I don’t always have to be swithing services to the “NEXT BIG THING”.

The fundamental concept that requires that economies operate “for pay”, in a universe with no unlimited sources of free energy, is the Second Law of Thermodynamics. This law of physics says that in this universe “things tend to disorder” (a.k.a. Entropy). Right in line with this concept, the proliferation of Free services on the internet is causing massive disorder. Services come and go constantly and I have to continuously expend energy just keeping up with all the random changes happening every day. Eventually we will all will lose patience with Free because its a big mess that takes too much time to wade through. Paid services will emerge that help clean it up for useful consumption.

People have always, and will always until we discover a free and virtually unlimited energy source in this universe, pay extra for cleanliness, quality and leisure time.

As the internet stream devolves from enjoyable dip in a clean and invigorating stream that most people can handle into; an overwhelming, near-drowning experience in a tsunami of toxic waste and dangerous sharks; you’ll start to see “for pay” services emerge. These services will distill the toxic, fullstream internet flood into something that is again not only consumable, but actually more enjoyable and more useful to the mainstream of internet user.

Eventually every “Wild West” has to be tamed. The cowboys will all mourn when the Open Range of the nascent 1995 to 2010 internet evolves into fenced farms and ranches and city planners. But such is life.

Rob

Great article. I am actually working on a start up right now with a hybrid free/paid model. MergeSkills.com is a start-up that addresses the need for skilled workers and entrepreneurs to respond to the many unanswered government solicitations and pursue new endeavors. We intend to allow memebers to signup and search the site for projects for free and charge for verification services which will ensure that people are who they say they are and will be able to complete the part of the project they say they can.

David Robins

Good article. I believe the future will be a hybrid model. Basic (free) service with ads, and paid service with enhanced features and ads free!

Paul

Are we going to see this topic rotated contunuously on GigaOm now that you have started your own paid service?? LOL

boaz

There are additional ways to pay. Example: build your own toolbar and allow only your toolbar users to access your content/or grant them priority in access. if it is your toolbar, your users are likly to use search and let you share in the add revenue around it.
I know someone who dropped his site completely, only his toolbar users get his content, which is unique, and his revenues now are far more than before.

Gadget Sleuth

I agree with the saying “No such thing as a free lunch”. Someone pays somewhere down the line, sometimes its you, sometimes its someone else.

Bruce Christensen

Free, like freedom is bought and paid for by someone. Don’t fool yourself into thinking that entrepreneurs and investors will continue to pay your way to web freedom.
The day has come when they are now saying; “If I can’t get money from the advertising community, then I guess that I will need to sell something”. http://bit.ly/WgV48

Becky

I am not sure that I agree that “paid” is the future of online business. I feel that there are better ways- Jack Bergstrand has some great ideas offered in his latest book Reinvent Your Enterprise. What I like about this book is that it focuses on what Peter F. Drucker, the father of management, emphasized as the greatest challenge of the 21st century—systematically improving knowledge work productivity—for companies and society.

alan p

Part of the book is a study of various indirect funding models, which is fine.

Where it goes wrong is the belief that a tend to zero is zero. This is perpetual motion economics, “near free” supplier distribution is not the same as free, and is the friction that makes this a fiction. As Gladwell noted, near free x large volumes = a large cost that has to be paid for.

And the rest of the value chain apart from supplier distribution is massively non-free. You pay for your broadband and user devices, and the main reason most high grade entertainment content is free is because content creators haven’t figured out a way to stop piracy yet.

Anyway, I blogged a more detailed response on these lines here:

http://broadstuff.com/archives/1779-Limits-to-Freeconomics-Part-IV-Freemium,-or-if-you-aint-paying-you-aint-the-customer.html

sak

Nothing is really Free. Anderson is selling a myth (galdwell very well recognizes that anderson’s books itself costs $27 and the wired subscription, $12). In the end consumers “pay” – either by having to filter through useless Ads (average click through rates of .1% are evidence of how much people wish to avoid ads). Second, advertisers get opportunity to needlessly push more products, which consumers end up buying.

The paid model is a better model. Even if 1% of facebook users pay $5/mth to use extra features (over a free basic plan) then that is close to 20 million paid subscribers (assuming 200 million users) generating $100 million/mth for Facebook – that is $1.2 billion a year! And if facebook sells the plan saying that 30% of the revenue goes through for making the servers more Green, then there is added incentive for subscribers to pay. (Each “free” click on facebook means small energy burn and thus a carbon burn and in the long run we all are paying for that. )

The same paid model can generate money for Twitter or Myspace or any such sites. And putting a price also corrects the market – a real value is easier to derive than a “speculative” value based on estimating worth purely eyeballs and Advertising.

And the “fear” that subscribers will leave Facebook for example and join another network because there is a $5 premium service charge is not backed by evidence. I am yet to see a mass “flock” happen because of fee introduction. And there are other reasons for this to be not as big a problem as perceived. First, basic service is free. Second, building your entire social network on a new platform and migrating all your photos etc is not trivial in terms of time and effort. Its a decent barrier to attrition. Yes there may be some loss but then you are cutting the fluff anyways.

The problem is on our VC backed mindset – “get VC cash and keep getting more users even if they really dont user the service and keep getting more page views even though no one wants to see the Ads”. Its an unsustainable model (or you cash out by selling based on speculation). Put a price and let those who really value the service, use it. In return offer good service and generate revenue.
Sorry, forgot to add great post! Can’t wait to see your next post!

sak

Nothing is really Free. Anderson is selling a myth (galdwell very well recognizes that anderson’s books itself costs $27 and the wired subscription, $12). In the end consumers “pay” – either by having to filter through useless Ads (average click through rates of .1% are evidence of how much people wish to avoid ads). Second, advertisers get opportunity to needlessly push more products, which consumers end up buying.

The paid model is a better model. Even if 1% of facebook users pay $5/mth to use extra features (over a free basic plan) then that is close to 20 million paid subscribers (assuming 200 million users) generating $100 million/mth for Facebook – that is $1.2 billion a year! And if facebook sells the plan saying that 30% of the revenue goes through for making the servers more Green, then there is added incentive for subscribers to pay. (Each “free” click on facebook means small energy burn and thus a carbon burn and in the long run we all are paying for that. )

The same paid model can generate money for Twitter or Myspace or any such sites. And putting a price also corrects the market – a real value is easier to derive than a “speculative” value based on estimating worth purely eyeballs and Advertising.

And the “fear” that subscribers will leave Facebook for example and join another network because there is a $5 premium service charge is not backed by evidence. I am yet to see a mass “flock” happen because of fee introduction. And there are other reasons for this to be not as big a problem as perceived. First, basic service is free. Second, building your entire social network on a new platform and migrating all your photos etc is not trivial in terms of time and effort. Its a decent barrier to attrition. Yes there may be some loss but then you are cutting the fluff anyways.

The problem is on our VC backed mindset – “get VC cash and keep getting more users even if they really dont user the service and keep getting more page views even though no one wants to see the Ads”. Its an unsustainable model (or you cash out by selling based on speculation). Put a price and let those who really value the service, use it. In return offer good service and generate revenue.

pwb

Don, yes he does: “I doubt content companies can charge for RSS. Your content has to be incredibly unique and valuable, which may describe Bloomberg but not the average media site.”

pwb

What a lousy article. No evidence is provided to support the non-Free position. Even cable TV at this point is more like Free than not (don’t we all pay $50 month for 400 channels, just like with our internet connections)?

The fact that is eluding the nay-sayers is the simple economics requires Free. When the cost of delivering the good is near-zero, the price of it will trend quickly towards zero. And 0.00 is a magical number because it avoids any friction whatsoever (for example vs 1 penny).

Mike

No startup can break the basic laws of economics, just like those startups claiming to break the laws of physics eventually fail. You use an oxymoron in your own comment, “near-zero” delivery costs, and “zero” price. The price can NEVER be zero if there is a delivery costs. Unless VCs pump money into you indefinitely of course.

One can argue that giving something for free and a premium service to a few paying users can support the free stuff can work, but that’s about it. Oh, and if you think any service can be free and run on ads, look at YouTube…

Don

Does Anderson really think *everything* should be free? Advertising leads to a profitable business only when you have a mass-market product – everyone in the whole world must use your product, often multiple times per day. Could Mathematica be given away for free and make money on ads? Could Photoshop be given away and make money on ads? Pro Tools? Although very popular, these products don’t have nearly enough users to be profitable selling advertisements. Instead, they sell products and are wildly profitable.

Does Anderson make the distinction between absolute mass market products, and those appealing to specialized markets?

Sophie

I agree it is essential to make a distinction between Mass Marketing and those in specialized markets.
However, I am not sure that Advertising works only with Mass Products, I have been successful in business and sales, including holding a Business masters degree, and found that if you know your niche and market to this specialized market it can be just as profitable. Are you familiar with Article Marketing?
This is an excellent way to use FREE to your advantage. I have done well in business winning award trips and bonuses, and have hit some truly rough spots, and really wondered where I was going to get the rest of my rent from.
I think free is a great way to start especially in this economy, if you have some money to invest then I would work with Ads, individuals can work with this to make income, but I agree that corporations will see bigger profits with selling the product and not just the Ad.

Here is a great article I found on how to tell if you will loose money with all of these crazy options out there, check it out.

http://ezinearticles.com/?Extremely-Vital-Tips—Make-Money-on-the-Internet—How-to-Tell-ASAP-If-Youll-Lose-Money?&id=2589282

Laurent

In the online gaming space where I work, it is clear that we’re moving to a microtransaction based system. Perhaps “free” with small fees for a once in a while perk might work?
I think if YouTUbe for instance charged a small fee for larger video uploads or for VERIFIED content creators it could be on to something. Scale + microtransaction = $$$$

I am just saying…. Just look at what Zynga is doing with it’s poker games.

Alan Wilensky

I would like to quote a Sand Hill VC who I presented to at a seminar for startups – I had just shown him a survey of 1000 towing and mobile glass shops that I was targeting for a dispatch business on Nextel handsets:

“we are not interested in paid subscriber businesses, we are looking for Facebook Applications”.

My survey evaluated out to a 19-30 $ mo. subscriber base of up to 30K New England subscribers that could have evolved to a National base of nextel using automotive service independents.

Feh.

Mari Silbey

Or like GigaOM Pro. ;)

Seriously- this is a well-written and very pragmatic post. And I love the reference to cable TV at the end given all the animosity around the idea of paying for video online.

Nathan

Isn’t this the model broadcast television and radio used forever? They give away shows and advertisers pay for it.

Rokhayakebe

Absolutely. And that is why they are mostly broke, and most free content (save PBS, NPR) sucks big time.

areyoukidding

Broadcast TV and radio broke? You don’t know what you are talking about.

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